Euro Struggles Ahead Of Italian Bond Auction, Sterling Eyes 1.6250

Market sentiment waned on Thursday amid the dismal developments coming out of Europe, and the shift away from risk-taking behavior may gather pace during the North American trade as the threat for contagion continues to drag on investor confidence.

Talking Points

Euro: Italy Faces Higher Financing Costs, Bond Auction In Focus

British Pound: Hits Fresh Yearly High. BoE Sees Case For More QE

U.S. Dollar: Index Breaks Upward Trend, 1Q GDP May Disappoint

Euro: Italy Faces Higher Financing Costs, Bond Auction In Focus

The Euro gave back the overnight advance to 1.3262 as heightening finance costs across the periphery countries raised the threat for contagion, and the EURUSD may track lower going into May as the bearish formation continues to take shape. Indeed, Italy sold EUR 8.5B in six-month bills yielding 1.772%, which compares to the 1.119% offered in March, and the 5 and 10-Year bond auction on tap for Friday may ultimately generate another bearish reaction in the EURUSD as fears surrounding the sovereign debt crisis resurface.

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At the same time, Spanish Prime Minister Mariano Rajoy warned that the region's ability to fund itself remains at risk amid the ongoing turmoil in the financial system, while policy makers in Germany said the European Stability Mechanism will not be utilized to shore up commercial banks as the EU tries to push through the new fiscal pact. As the group refrain from taking additional steps to address the debt crisis, the weakening outlook for the region continues to cast a bearish outlook for the EURUSD, and the single currency may weaken further in May as European policy makers look towards the Governing Council for additional monetary support. As the region continues to face a risk for a prolonged recession, we should see the European Central Bank carry out its easing cycle throughout 2012, and we are still waiting for a selloff in the EURUSD as price action approaches the apex of the descending triangle.

British Pound: Hits Fresh Yearly High. BoE Sees Case For More QE

The British Pound climbed to a fresh yearly high of 1.6206 even as the Bank of England struck a cautious outlook for the region, and the GBPUSD looks poised to test the 23.6% Fibonacci retracement from the 2009 low to high around 1.6250 as central bank drops its dovish tone for monetary policy. BoE board member Martin Weale said that the dismal 1Q GDP report raises the scope for more asset purchases as the region faces a double-dip recession, but the stickiness in underlying inflation may push the central bank away from its easing cycle as the Monetary Policy Committee anticipates to see a faster recovery later this year. As the GBPUPSD maintains the upward trend from earlier this year, the pair may mark fresh yearly highs going into May, but the pair remains poised for a short-term correction as the relative strength index approaches overbought territory. Should the 23.6% Fib act as new resistance, we should see the 1.6000 figure (former resistance) come in as new support, and we will maintain a bullish outlook for the sterling as the BoE changes its tune for monetary policy.

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U.S. Dollar: Index Breaks Upward Trend, 1Q GDP May Disappoint

The greenback remains under pressure on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)tumbling to a fresh monthly low of 9,877, and the reserve currency may track lower going into the end of the week as it breaks out of the upward trend from earlier this year. However, as the 1Q GDP report comes into focus, an above-forecast print could spark a rebound in the greenback, but the advance reading has had a tendency of falling short of market expectations, which could foster a bearish outlook for the USD. As Fed Chairman Ben Bernanke continues to dampen expectations for a rate hike, the cautious tone held by the central bank head may continue to drag on the exchange rate, but we may see the dollar regain its footing going into May as the central bank raises its outlook for growth and inflation.